Tax Tips for Finance

Following are some generally recognized financial planning tools that may help you reduce your tax bill.

Charitable Giving - Instead of selling your appreciated long-term securities, donate the stock instead and avoid paying tax on the unrealized gain while still getting a charitable tax deduction for the full fair market value.

Health Savings Accounts (HSAs) - If you have a high deductible medical plan you can open an HSA and make tax deductible contributions to your account to pay for medical expenses. Unlike flexible spending arrangements (FSAs), the contributions can carry over for medical expenses in future years.

ROTH IRAs - Contributions to a ROTH IRA are not tax deductible but the qualified distributions, including earnings are tax-free.

Municipal Bonds - Interest earned on these types of investments is tax-exempt.

Own a home - most of the cost of this type of investment is financed and the interest (on mortgages up to $1,000,000) is tax deductible. When the property is sold, individuals may exclude up to $250,000 ($500,000 if married jointly) of the gain.

Retirement Plans - Participate in your employer sponsored retirement plan, especially if there is a matching component. You will receive a current tax deduction and the tax-deferred compounding can add up to a large retirement savings.

Some generally recognized financial planning tools that may help you reduce your tax bill.

If you own a home, you can claim a deduction for the interest paid. To be deductible, the interest you pay must be on a loan secured by your main home or a second home. The loan can be a first or second mortgage, a home improvement loan, or a home equity loan. To be deductible, the loan must be secured by your home but the proceeds can be used for other than home improvements. You can refinance and use the proceeds to pay off credit card debt, go on vacation or buy a car and the interest will remain deductible. There are other financial reasons for not wanting to do this but it will not disqualify the deduction.

The interest deduction from your home equity loan is not unlimited. You can generally deduct interest you pay on the first $100,000 of a home equity loan. After that, it depends. If the home equity loan was used to improve your first or second home, or to purchase a second home, you can probably take the deduction on an amount up to $1 million or the value of the home

If you own a home, you can claim a deduction for the interest paid. To be deductible, the interest you pay must be on a loan secured by your main home or a second home. The loan can be a first or second mortgage, a home improvement loan, or a home equity loan.

Almost everything you own and use for personal purposes, pleasure or investment
is a capital asset. The IRS says when you sell a capital asset, such as stocks,
the difference between the amount you sell it for and your basis, which is
usually what you paid for it, is a capital gain or a capital loss. While
you must report all capital gains, you may deduct only your capital losses
on investment property, not personal property.

A “paper loss” — a drop in an investment’s value
below its purchase price — does not qualify for the deduction. The loss
must be realized through the capital asset’s sale or exchange.

Capital gains and losses are classified as long-term or short-term, depending
on how long you hold the property before you sell it. If you hold it more than
one year, your capital gain or loss is long-term. If you hold it one year or
less, your capital gain or loss is short-term. For more information on the
tax rates, refer to IRS Publication 544, Sales and Other Dispositions of Assets.

If your capital losses exceed your capital gains, the excess is subtracted
from other income on your tax return, up to an annual limit of $3,000 ($1,500
if you are married filing separately).

Capital gains and losses are reported on Schedule D, Capital Gains and Losses,
and then transferred to line 13 of Form 1040. There is a worksheet in last year’s
Instructions to Schedule D to figure a capital loss carryover to this year. This
is usually a very complicated matter, so please contact us so that you
may receive the professional advice you deserve.

Almost everything you own and use for personal purposes, pleasure or investment is a capital asset. The IRS says when you sell a capital asset, such as stocks, the difference between the amount you sell it for and your basis, which is usually what you paid for it, is a capital gain or a capital loss. While you must report all capital gains, you may deduct only your capital losses on investment property, not personal property.

A Coverdell Education Savings Account (ESA) is a savings account created as
an incentive to help parents and students save for education expenses.

The total contributions for the beneficiary (who is under age 18 or is a special
needs beneficiary) of this account in any year cannot be more than $2,000,
no matter how many accounts have been established. The beneficiary will not
owe tax on the distributions if, for a year, the distributions from an account
are not more than a beneficiary’s qualified education expenses at an
eligible education institution. This benefit applies to higher education expenses
as well as to elementary and secondary education expenses.

Generally, any individual (including the beneficiary) can contribute to a Coverdell
ESA if the individual's modified adjusted gross (MAGI) income is less than
an annual, constantly changing maximum. Usually, MAGI for the
purpose of determining your maximum contribution limit is the adjusted gross
income (AGI) shown on your tax return increased by the following exclusion
from your income: foreign earned income of U.S. citizens or residents living
abroad, housing costs of U.S. citizens or residents living abroad, and income
from sources within Puerto Rico or American Samoa. Contributions to a Coverdell
ESA may be made until the due date of the contributor’s return, without
extensions.

A Coverdell Education Savings Account (ESA) is a savings account created as an incentive to help parents and students save for education expenses.

If you haven’t contributed funds to an Individual Retirement Account
(IRA) for last tax year, or if you’ve put in less than the maximum allowed,
you still have time to do so. You can contribute to either a traditional or
Roth IRA until the April 15 due date for filing your tax return for last year,
not including extensions.

Be sure to tell the IRA trustee that the contribution is for last year. Otherwise,
the trustee may report the contribution as being for this year, when they get
your funds.

Generally, you can contribute a percentage of your earnings for the current year or a larger, “catch-up” if
you are age 50 or older. You can fund a traditional IRA, a Roth IRA (if you
qualify), or both, but your total contributions cannot be more than these annual
amounts.

You may be able to take a tax deduction for the contributions to a traditional
IRA, depending on whether you — or your spouse, if filing jointly — are
covered by an employer’s pension plan and how much total income you have.
You cannot deduct Roth IRA contributions, but the earnings on a Roth IRA may
be tax-free if you meet the conditions for a qualified distribution.

You can file your tax return claiming a traditional IRA deduction before the
contribution is actually made. However, the contribution must be made
by the due date of your return, not including extensions. If you report a contribution
to a traditional IRA on your return, but fail to contribute by the deadline,
you must file an amended tax return by using Form 1040X, Amended U.S. Individual
Income Tax Return. You must add the amount you deducted to your income
on the amended return and pay the additional tax accordingly.

If you haven’t contributed funds to an Individual Retirement Arrangement (IRA) for last tax year, or if you’ve put in less than the maximum allowed, you still have time to do so. You can contribute to either a traditional or Roth IRA until the April 15 due date for filing your tax return for last year, not including extensions.